Foreign investors have significantly increased their purchases of Indian government bonds in the last four sessions, driven by weaker-than-expected economic growth data that sparked expectations of a monetary policy easing by the Reserve Bank of India (RBI). This surge in foreign investment saw net purchases of over US$ 1.06 billion (Rs. 9,000 crore) in bonds under the Fully Accessible Route (FAR) until Wednesday, marking a significant turnaround from the trend in November when foreign investors were net sellers. At one point in November, net sales in FAR bonds exceeded US$ 1.18 billion (Rs. 10,000 crore), largely influenced by elevated US yields and concerns about the Federal Reserve's monetary policy, particularly after Donald Trump's election victory.

This shift in investor sentiment reflects the growing optimism that the RBI may take steps to ease monetary conditions, possibly including a reduction in the cash reserve ratio (CRR), which is currently at 4.5%. A 50 basis point (bps) CRR cut could release US$ 12.98 billion (Rs. 1,10,000 crore) into the banking system, providing much-needed liquidity and stimulating demand for bonds. The 10-year bond yield has already dropped to a three-year low, and the spread with the repo rate has narrowed to a seven-year low, signaling that monetary easing could be on the horizon.

Market participants are keenly watching these developments, with many analysts predicting that the RBI may reduce rates in its upcoming policy meeting. Mr. Dhiraj Nim, from ANZ, noted that the current downside risks to growth could prompt the RBI to act soon. Meanwhile, Mr. Manish Bhargava, from Straits Investment Management, suggested that the weak economic growth data could indicate economic slack, thereby increasing the likelihood that the RBI will intervene sooner than expected.

Despite the prevailing expectations of a rate cut, India's relatively high yields and stable rupee continue to make the country an attractive destination for foreign investors. The combination of favorable bond yields and the potential for monetary easing has driven renewed interest in the Indian debt market, especially with India's bonds being included in major indices like the JPMorgan debt index. This inclusion is expected to continue to draw foreign capital into the Indian bond market, as investors seek higher returns amidst the ongoing global economic uncertainty.

As the economic landscape shifts and the RBI's monetary policy evolves, foreign investors are likely to remain active in the Indian bond market, with the expectation that further rate cuts and liquidity infusions will continue to support the sector’s growth. The combination of these policy changes, coupled with India’s attractive bond yields and economic stability, positions the country’s bond market as a top choice for foreign capital in the coming months.

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